Professional Level – Options Module, Paper P6 (MYS)
Advanced Taxation (Malaysia)
June 2012 Answers
All statutory references are to the Income Tax Action 1967, while amended, until otherwise stated. 1
Moodes Sdn Bhd
Economical Controller, Moodes Sdn Bhd
15 Summer 2012
Report on the taxes treatment of the sale of the swimsuit product line plus the research and development job As instructed, we add below the duty implications of the sale of the swimwear production and the approved research and development (R& D) job by Moodes Sdn Bhd (MSB).
Sale of the swimwear production
MSB features entered into a customer and purchase agreement to dispose of the swimwear product line for RM12·8 mil. It is important to look for the nature on this amount so the appropriate taxes treatment is accorded in the coming year(s). (1) Capital or earnings receipt?
MSB is in the organization of producing and selling everyday wear. The merchandise lines it owns happen to be intangible fixed assets. Consequently, a product range is MSB's capital advantage, not their stock or circulating advantage. After the disposal of the swim wear production series, MSB won't be able to generate the swim wear under the production. The transaction relates even more to the capital structure rather than the operations of MSB. The simple fact that the takings are payable in 8 instalments comprising three years does not alter its capital nature. The instalment payment scheme is merely a way of settling the debt which arose as a result of the sale of a capital asset. Consequently , the RM12·8 million represents a capital receipt and should not become assessed to income tax since it is not profits. Revenue invoice
At first glance, it appears that the product lines are set intangible assets. However , the merchandise lines are numerous in amount and they are regularly changing. The buying and selling of product lines can be regularly accomplished as and when the opportunity and circumstances warrant. The frequency of such revenue renders all of them revenue in nature. Moreover, it is observed that the removal of the swimsuits product line would not bring about a tremendous impact on you�re able to send turnover or staff durability. In fact , MSB is going to recruit more personnel and as if business could be more than usual. Consequently , the sale from the swimwear production has not had a substantial effect on the capital framework of the organization.
Given the attendant situations, the convenience of product lines is a usual incidence in MSB's business. Therefore , the receipt of RM12·8 , 000, 000 represents a revenue invoice and should end up being subject to income tax. Conclusion
These arguments present that there are persuasive grounds to get the amount being capital in nature and equally effective arguments being made for that being earnings in mother nature. On balance, we would lean for the capital receipt argument. The causes for our view are: –
a product or service line is definitely undeniably a fixed capital property of MSB;
a disposal of a fixed asset, on the other hand often repeated, remains a disposal of your fixed property; and when a receipt has the ability to of being possibly capital or perhaps revenue, the main advantage of the doubt should be directed at the taxpayer.
Therefore , we all maintain the RM12·8 mil is not revenue profits, hence, not necessarily subject to tax. (2) Recognition of the RM12·8 million as revenue salary
Assuming that the RM12·8 million is earnings in mother nature, there are two possible angles for recognising the profits. Entire amount
This approach acknowledges the entire quantity of RM12·8 million as income when the disposal is usually concluded. The simple fact that the complete sum is not received can be not relevant as the accrual basis of recognising salary is adopted for business origin income.
The foundation for this approach is that upon the conclusion with the transaction, a debt of RM12·8 million has developed. The entire total is payable: the instalment layout is merely a mutually agreed mode of payment. Within this basis, the...